You don’t have to look any further than your own wallet to get a keen sense of digital disruption in retail banking.

Retail banking - and wallets - have changed

Retail banking – and wallets – have changed

Odds are your wallet is significantly thinner than the ones people carried two decades ago — before cash became a novelty and writing checks became passé.

Now our preferred payment methods are as likely to be stored in our smartphones as in our back pockets.

And cash isn’t even welcome on casino floors.

The Rise of Debit and Credit Cards

Before you think I’m exaggerating, consider a few facts:

  • Since 2000, consumers and businesses have minimized checks in favor of card payments and electronic transfers via the automated clearinghouse (ACH) system. In 2015, checks written accounted for 13.4 percent of noncash payments and 15.4 percent of their value, compared with 57.8 percent of noncash payments and 66.7 percent of their value in 2000, data from the US Federal Reserve shows.
  • More and more businesses, from parking garages and state toll roads to retail stores and airlines, are experimenting with no-cash policies. Most airlines stopped taking cash for in-flight purchases of food and beverages around 2010. A New Jersey court even upheld the practice — meaning now even a child traveling alone needs a payment card to buy a snack on a flight.

Last month, Visa introduced a Cashless Challenge that aims “to create a culture where cash is no longer king.” The plan is to persuade restaurants, cafés and food trucks to just say no to cash in favor of credit cards or digital payments.

“Visa will be awarding up to $500,000 to 50 eligible US-based small business food service owners who commit to joining the 100 percent cashless quest,” the payments technology company explained.

Cash Isn’t Welcome

Contrary to what you may think, there’s no federal statute requiring businesses to accept currency or coins as payment for goods or services. “Private businesses are free to develop their own policies on whether to accept cash unless there is a state law which says otherwise,” according to the US Treasury.

Massachusetts, which does have a law on the books that requires all retail establishments to accept cash payments, seems to be the exception.

The Evolution of Retail Banking

How Americans pay for goods and services reflects a broader evolution of financial services.

According to PwC’s 2017 Digital Banking Consumer Survey, 46 percent of consumers use only digital channels such as mobile phones, PCs, and tablets to conduct their banking, avoiding traditional physical channels and call centers altogether. That’s up from 27 percent just four years ago.

The research also found:

  • 82 percent of 18 to 24-year-old smartphone owners say they use mobile banking
  • 60 percent of all smartphone owners use mobile banking in some way, up from 36 percent four years ago

PwC partners Catherine Zhou and Ashish Jain said financial institutions, until recently, have focused on addressing the needs of “omnichannel” customers: those who visit branches, use online banking on a website, call the contact centers, and use apps on their smartphones, all interchangeably.

But “over the past few years, this group of omnichannel users has been significantly shrinking, and it is being replaced by the “omni-digital” customers. The shift is big, and with it comes big implications for bank strategy, investments, business and staffing models,” they stated.

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PWC Digital Banking Consumer Survey

Banks today need very sophisticated analytics and personalization capabilities, as well as greater agility to meet the needs of an increasingly digital population.

“From a technology perspective, this could involve anything from rethinking APIs and faster integration down to a native core transformation. And there’s the matter of business agility, too: faster product manufacturing, real-time distribution, real-time learning of pricing and customer value propositions, deep personalization of offerings, and so on.”

Addressing Digital Challenges

IDC estimates retail banks (including thrift banks and credit unions) in the United States will spend $20.2 billion on hardware, software, services, and internal IT staff to develop and implement digital transformation initiatives in 2017, growing at an average compound annual growth rate of 22.5 percent into 2020. This compares with growth of 4.8 percent in overall IT spend for U.S. banks.

Connected customers are demanding innovation in the ways the bank — and the ways their banks address their needs.

But at least perceptually, banking appears to be lagging against other industries when it comes to innovation. According to the Salesforce 2017 Banking Report, about 1 in four of more than 2,000 US adults surveyed think healthcare and retail are changing faster than banks.

As FinTech companies disrupt the banking industry and provide consumers with new ways to borrow, lend and manage their money, retail banks are under more pressure than ever to meet the growing expectations of today’s digitally savvy consumers, the report suggests.

Retail Banks: Risking $45B of Profit

Research by McKinsey & Company drew similar conclusions. It found banks in the US are risking up to $45 billion of their profits from digital disruption over the next three years.

That “underscores the urgent need” for these banks to upgrade their technology to meet the demands of an increasingly digital economy.

Continuing to rely heavily on older legacy systems may lead to a loss of market share, as well as other challenges.

“To counter the headwinds now gathering force, most banks will need to embark on a fundamental transformation that exceeds previous efforts, centered on the themes of resilience, reorientation, and renewal,” it states.

Banks not only need to ensure viability by protecting their profitability, their customer franchises, and their regulatory position. They must also adopt new technologies and “reorient the business model to the customer and the new digital environment.

That will help establish the bank as a platform for data and digital analytics and processes, and aggressively linking up” with technology providers and one another to share costs through industry utilities.

Today many customers would rather use their smartphones or computer tablets for their banking needs. So banks must implement the right balance between human and digital interactions with their customers, the report concludes.

Need help driving your own digital transformation? Contact Arke CMTO Chris.Spears@arke.com for more information.

Noreen Seebacher is the content evangelist at Arke, where she researches, writes and continues her long career in news reporting as a brand journalist. Noreen lives in Beaufort, South Carolina with her husband, her dog and four formerly homeless cats.